Learn How to Calculate Crypto Tax
When it comes to virtual currency, there is a lot of confusion on how to calculate crypto tax correctly. The Internal Revenue Service (IRS) and taxpayers have given crypto a lesser focus in the past, but as the crypto market is growing, the IRS has clarified crypto tax questions.
People dealing with crypto should file their taxes with a crypto tax report to avoid a bad outcome. Also, knowing your tax situation can enable you to avoid fees and penalties later on, whether you're HODLing Shiba INU, Dogecoin, or day trading Litecoin.
I'll break down the process so you can calculate crypto taxes easily. Moreover, I'll share information on crypto capital gains and income, along with solutions on how to calculate crypto tax to remain compliant.
What is crypto tax?
Most cryptos are convertible virtual currencies, as per the IRS. They can be used as a means of exchange, a reserve currency, a unit of account, and money. Any gains or income you make from cryptocurrency are also subject to taxation.
The IRS treats crypto as stocks, bonds, and other capital assets in the U.S. Depending on how you got it and how long you held it, crypto gains are either taxed as capital gains or income.
How you used crypto in 2022 will determine if you owe taxes. Events that are subject to tax are known as taxable events. Activities that are not taxable are exempt from paying taxes. To sum it up:
Taxable events for cryptos
Short- or long-term tax rates apply when selling crypto for a profit.
Trading one cryptocurrency for another is taxable.
Changing crypto to stablecoin can be a taxable event.
When you pay with cryptocurrency, you're taxed on the purchase price.
Cryptocurrency mining profits are taxable.
Once you own coins, the taxable period begins.
Bonus Bitcoin from a new exchange or Litecoin pay may be taxable.
Non-taxable events for cryptos
If crypto you own alters its core technology or coin name, you won't owe taxes unless the value also changes.
Gifting is not taxable, but they must pay taxes when they sell.
If you give crypto to a registered charity, you don't have to pay taxes on it.
How to calculate crypto income?
Crypto income is simple to compute. Take the coins' or tokens' actual market value in fiat currency on the date you got them. Let's take mining Bitcoin as an example. You earned 0.2 BTC, which you received on January 1, 2022. That day, the value of 0.2 BTC was $7,334. So you have $7,334 in crypto income, on which you will pay Income Tax at the standard rate.
That's how easy it is. Paying Income Tax on crypto does not free you from paying Capital Gains Tax on crypto if you later sell, trade, spend, or gift it. Therefore, let's also consider how to calculate crypto capital gains.
How to calculate crypto capital gains?
When calculating crypto capital gains, you will now consider the cost basis and fair market value on the transaction date.
The cost basis includes fees and commissions paid on your investment. For example, your cost basis would be $5,000 if you bought 1 BTC. The price of the cryptos on the day of the transaction is the market value. Let's say you traded 1 BTC for $8,000 is worth $8,000 today.
Cost base minus market value equals capital gain. $8,000 - $5,000 = $3,000 capital gain. To determine a loss, deduct the market value from the cost basis. If you sold 1 BTC for $4,000, you'd lose $1,000.
Capital gains and losses are treated in a different way for tax purposes. Capital gains are taxed at your marginal tax rate, but capital losses can be used to offset capital gains and lower your tax liability.
Another example: You paid $4000 for 0.4 BTC on January 1, 2021. In 2021, you sold 0.4 BTC for 10 ETH. Later, on January 1, 2022, you sold ten ETH for $20,000 in total.
Your 2021 gain is $16,000 ($20,000-$4,000). $12,000 would be long-term gains (because you held BTC for almost a year) and $4,000 short-term gains (since you held your ETH for less than a year before selling).
Crypto capital gains are tricky to calculate. Because capital gains are taxable, accuracy is vital. If you're confused about how to compute your profits, use cryptocurrency tax software.
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How can I calculate the estimated crypto tax?
It only takes three steps to learn how to calculate crypto tax for gains and losses: First, compute your profits. After that, determine your tax bracket. Finally, file your taxes!
Below, I'll go over each of these steps in more detail.
Calculating your gains and losses
For every crypto sale or trade, you must calculate the difference between your "basis" (original asset cost, including fees) and sale proceeds. It is the transaction's gain or loss.
To figure out your cryptocurrency tax, you'll need to know:
Your base cost (what you paid for the crypto).
The fair market value of the coin at the moment of selling.
Time spent keeping crypto in your possession.
Determining your tax bracket
The following step in how to calculate crypto tax is to identify your tax bracket. It will affect how much capital gains tax you owe on crypto profits. A sale triggers capital gains tax for more than you paid. Short-term gains occur when you sell the investment after one year for a profit—taxable at 10% to 37% of ordinary income in the tax year of 2022.
Long-term capital gains occur from holding an asset for over a year. These are taxed at 0%, 15%, or 20% of 2022 taxable income. Most taxpayers pay 15% on long-term capital gains.
Filing your taxes
Once you know your tax bracket and how much money you made or lost last year, you can file your taxes. You should report if you made money by trading coins or investing in the past year. It includes both profits and losses from staking and mining.
To get taxed on cryptocurrency is the same as getting taxed on any other investment. Your tax return should include a Schedule D form, which you can get from the IRS website.
On Schedule D, you'll list all your crypto transactions for the year, including the date, type, amount, and price of each. Then, you'll use this info to add your total gain or loss and your tax bill.
However, doing your taxes is challenging, and hiring a tax professional can be costly. I will now provide an overall idea of the most influential crypto tax software to overcome this issue.
If you need an easy way to make tax documents, CoinLedger is my top choice. You can trust that your taxes will be correctly filed because they support numerous integrations.
You'll love its ease of use; all you have to do is import your transactions, and the software will take care of the work.
Get started with Coin Ledger's free trial today to experience how easy it is to track your finances. Read the full Coin Ledger review now.
Coin Tracker is excellent crypto tax software since it integrates with reputable tax preparation programs like Intuit TurboTax and H & R Block. It can swiftly and effortlessly generate tax forms, making it easy to keep track of your digital earnings and file your taxes.
It is also affiliated with Coinbase and OpenSea, two highly regarded cryptocurrency and NFT software programs. And numerous users trust their crypto tax calculator.
Use can also use a crypto tax calculator, such as Koinly. It is, without a doubt, a great option among cryptocurrency taxation tools. It is intuitive and user-friendly, making it ideal for people who are new to the world of cryptocurrency taxes. It is also suitable for traders who frequently buy and sell across several platforms and wallets without keeping accurate records of their transactions.
I've been using Koinly for a while and haven't had any problems. It indeed helped me stay organized and on top of my taxes. As a whole, Koinly is a fantastic cryptocurrency tax software.
Blockpit is also one of the best cryptocurrency tax software in the market. It's the tremendous free crypto tax calculator available. It works with over 40 cryptocurrency exchanges to simplify tax season when you need to figure out what you owe for crypto sales and purchases.
It allows you to calculate your taxes on all your cryptos automatically, so don't worry about how to calculate crypto tax for multiple assets. It also provides a diverse range of features to help you keep track of your portfolio.
So do, keep a record of your crypto transactions with the best crypto tax trackers in 2022.
Filing your crypto taxes in the U.S. and other countries
The U.S. is one of the known countries that tax currency. Thus, it's necessary to follow IRS regulations. Most gains are taxed, but there are exceptions. Capital gains taxes may apply if you buy or pay using cryptocurrencies. You may owe capital gains taxes if you mine or receive crypto as compensation.
In general, if you've made a profit on your cryptocurrency holdings, you'll owe taxes on them. Profits are computed by subtracting the purchase price from the current market value. Some tools, such as CoinTracker, exist to assist those unsure how to calculate their actual gains.
What is the difference between long and short-term capital gains taxes?
The holding time distinguishes long-term from short-term capital gains tax. It would be best if you held the asset for more than a year to benefit from long-term capital gains.
Short-term capital gains are taxed if held for less than a year and at the 37% ordinary income tax rate. So based on your tax bracket, long-term capital gains are taxed at a reduced rate of 0%, 15%, or 20%.
What if I didn't pay my crypto taxes?
You can face interest and penalties if you don't pay crypto taxes. The IRS may file liens or levies, seize assets, or pursue criminal charges. Pay your crypto taxes on time and thoroughly.
Several resources can assist you in filing your crypto taxes. The IRS has provided instructions on reporting virtual currency transactions, and tax software can help with filing.
Who should report crypto tax to the IRS?
According to IRS guidance, virtual currencies should be considered property for tax purposes. General property sale principles apply. Anyone who sells, trades, or otherwise disposes of virtual money must declare gains to the IRS.
For example, if you "mined" cryptocurrency, you would have to pay taxes on the value of the coins you received. IRS requires U.S. taxpayers to record crypto activities. Additionally, all Americans who make income are subject to taxation.
How to avoid or save on Crypto Taxes?
If you decide to hold cryptocurrency for more than a year before selling it, you may be privileged by the lower long-term capital gains tax rate. Other capital gains may mitigate cryptocurrency losses. In a few countries, there is a limit below which you don't have to pay capital gains tax. Investing in an IRA or pension may provide tax savings.
Moreover, if you give away cryptocurrency as a gift, you may not owe capital gains tax. High-income earners might decrease their tax bills by putting money into crypto through a trust or partnership. You may be allowed to deduct cryptocurrency donations from registered charities. Transferring some crypto assets to your partner may reduce your tax bill if you're married.
What records to keep for crypto tax purposes?
It would help if you kept a few sorts of crypto tax records:
Records of all cryptocurrency transactions. It comprises date, time, quantity, price, and kind (buy/sell).
The records of all exchanges and wallets you've utilized.
Your cost basis for each coin. Your cost basis (the price you paid or fair market value if you inherited it) plus any fees or additional charges involved with the transaction.
A record of all bitcoin disposals, including date, time, amount, price, and all kinds of transactions.
It will help you compute gains and losses accurately and explain any deductions or credits you claim.
If you have issues regarding how to file your crypto taxes, consult a tax professional or utilize one of the top crypto tax software solutions. Because cryptocurrency tax laws are continuously changing, keeping up is challenging.
Crypto gains may be liable to income tax and VAT. These taxes, however, will differ depending on where you live. Some nations (like the U.S.) have short-term and long-term Capital Gains Tax rates, whereas others use your Income Tax rate. Many countries allow tax-free capital gains up to a specific limit. Know you every thing on how to calculate crypto tax. Thanks for reading!